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Putting Productivity First - TPRP 08/01

New ideas are the driving force of productivity

In February 1882, The Dunedin sailed with a cargo of frozen mutton and lamb from the Totara estate near Oamaru, reaching London in May 1882 with the meat in perfect condition. Today, this is unremarkable, but in the earlier part of the 19th century it was unthinkable. The invention of refrigeration altered the industrial landscape of New Zealand. It made small farms more profitable as sheep could be raised for the export of both meat and wool. Given a different set of financial incentives, farmers did what rational economic agents do; they altered their production methods, shifting from the rearing of Merino sheep towards Romneys that produced more meat. In less than 20 years, the export value of meat had grown to half the export value of wool. The innovation drove a revolution in New Zealand, and left many farmers considerably better off.[20]

Worldwide, resources devoted to innovation are increasing. Real gross domestic expenditure on research and development increased by approximately 3.6 per cent per annum in the OECD between 1995 and 2005, and by 18.5 per cent per annum in China (albeit this was from a much lower base).[21] These increases in scientific endeavour are producing results that affect both business and consumers by providing the basis for technological breakthroughs that offer consumers and businesses new products and solutions. The number of triadic patents (patents registered in the USA, the EU and Japan collectively) has increased from less than 35,000 per annum in 1995 to over 53,000 per annum in 2005.[22] Increases in global knowledge provide New Zealand firms with massive opportunities to upgrade their businesses, but also present the risk that if New Zealand’s innovation performance is poor, there are other countries and new locations ready to compete.

New Zealand’s innovation performance

The innovation framework is sound and business R&D has grown rapidly…

New Zealand’s wider innovation framework is considered sound,such as policies affecting competition and firm dynamics, and the infrastructure for public research investment.[23] NZ has a strong research base: it is ranked 9th out of 23 OECD countries for the number of science and engineering articles per million inhabitants and is ranked 7th in the number of researchers per 1000 people employed.[24],[25] Business R&D has been increasing rapidly; it grew at an annual rate of seven per cent from 1995 to 2004, much faster than Australia, the UK, the US and the OECD average, and 52 per cent of firms report some form of innovation, comparable to other OECD countries.[26], [27]

…but business R&D remains low by international comparison

Despite recent growth, business R&D is still very low by international standards at 0.49 per cent of GDP compared to the OECD average of 1.49 per cent.[28] The number of patents per million inhabitants is also low; suggesting that commercialisation of the research base is a challenge.[29]

R&D is just the start, investing in education and ICT allows the application of this knowledge

Innovation is more than just research and development though; investments in higher education enable innovative solutions to be implemented and investments in capital, such as information and communication technologies, enable the spread of new ideas. The OECD measures investment in knowledge to be expenditure in R&D, higher education and software collectively. On this metric New Zealand performs better than a focus solely on R&D would suggest.

Figure 2 - Investment in Knowledge 2004
Figure 2 - Investment in Knowledge 2004.

Source: Statistics New Zealand, OECD at a Glance 2007

Policy considerations

In a small economy, New Zealand firms must leverage from external sources of knowledge

The innovation system needs to maximise the opportunities for firms and individuals to leverage from externally-undertaken research including public research institutions, international research and through fostering learning between industries and firms within New Zealand. The new tax credit aims to help further lift the low level of firms’ own R&D, increase their openness to new ideas and improve their ability to absorb external knowledge. New Zealand is responsible for only 0.16 per cent of R&D in the OECD and undertakes a tiny proportion of global innovation;[30] therefore policy must go beyond domestically-sourced innovation and encourage international linkages that give access to the most up-to-date technology that is available globally.

Leveraging off the public sector

The output from public research institutions must be market-facing and responsive to firms’ needs. Policies that help provide networking opportunities between firms and researchers and that help to build the internal capabilities that firms require, will help improve the widespread adoption of new profitable ideas. Public R&D is a high proportion of total R&D, making knowledge exchange with the private sector important to get good returns on that investment. In 2005, New Zealand had the highest percentage in the OECD of R&D undertaken by public research organisations but funded by business.[31] This is a good aspect of links between firms and public research organisations. However, stronger links are needed and some factors could still present barriers to firm innovation, for example; uncertainty of returns from innovation due to exchange rate volatility or regulations; capital market underdevelopment inhibiting access to finance, connections and expertise; and the lack of advanced broadband products and services at competitive prices.

Leveraging off the global knowledge pool

In all but a few sectors New Zealand is behind the technological frontier.[32] However, it is unreasonable to expect all sectors in a small economy to be at the fore of technological breakthroughs. The speed at which firms adopt new technologies developed elsewhere is fundamental in maintaining high levels of productivity and closing the productivity gap with comparator countries. The challenge for most New Zealand firms is to adopt and adapt technologies from overseas rather than create new scientific knowledge domestically. Policies aimed at helping firms to acquire the information and to build the national and international connections that will aid them to introduce the most productive technologies and practices could have a large impact on the adoption of innovation.

Notes

  • [20]Michael King, The Penguin History of New Zealand.
  • [21]Science, Technology and Industry Scoreboard 2007, OECD.
  • [22]Science, Technology and Industry Scoreboard 2007, OECD.
  • [23]OECD Review of Innovation Policy: New Zealand 2007.
  • [24]OECD Science, Technology and Industry Outlook 2006.
  • [25]OECD Science, Technology and Industry Outlook 2005.
  • [26]Statistics New Zealand, Innovation in New Zealand 2005.
  • [27]OECD Science, Technology and Industry Outlook 2006.
  • [28]OECD in Figures 2006-07.
  • [29]OECD Science, Technology and Industry Outlook 2006.
  • [30]OECD Main Science and Technology Indicators Dataset, 2005.
  • [31]OECD, Main Science and Technology Indicators, 2006.
  • [32]Mason, Geoff and Matthew Osborne, “Productivity, Capital-Intensity and Labour Quality at Sector Level in New Zealand and the UK” New Zealand Treasury Working Paper 07/01.
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